An instrument issued to a buyer/contractor by an acceptable third party (a bank) guaranteeing that the buyer/contactor will comply to its obligations under the contract. If he/she fails to do so, the bank will be liable for the said amount.
Types of Guarantees
- Bid/Tender Guarantee (bond)
- Performance Guarantee (bond)
- Advance Payment Guarantee
- Payment Guarantee
- Retention Guarantee
A bond issued by the bank on behalf of a customer to aid the bidding for a contract. This essentially guarantees that the customer will not pull out of the bidding process
Enables the customer tender for more bids
An undertaking required by the contract employer or a principal from a contractor as security for their performance. The bond usually states that the contractor has the ability to carry out the job. This is normally issued to cover the duration of the contract.
Validates the contract awarded to the contractor.
Advance Payment Guarantee
This is a guarantee issued to enable contractors collect mobilization fees for contracts won. Here the bank becomes liable if after collection of the money, the contractor still fails to execute the project.
Enables the customer make necessary preparations for initial star- up of project.
This is an undertaking or an agreement where the bank agrees to be liable for the debt of a customer to a third party or beneficiary on default.
Boosts the customer’s turnover
Relief of working capital
An undertaking by the bank to the Contract Employer, which enables the contractor (the Bank’s client) collect the funds that ordinarily would have been withheld by the Contract Employer for a specified period to take care of any flaws/defects on the project/contract executed
Avails the contractor with the required 10% retention so as to move on to other projects.
Avails the contractor with working capital earlier than expected